8. Emerging Markets: Big Challenges, Big Opportunities

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Emerging markets are an amalgamation of paradoxes. Some 4.5 billion people remain unconnected to the internet, but most of them live within areas covered by 2G or 3G mobile access.57 Mobile broadband is the key to getting people online, but greater mobile penetration depends on handset costs falling at the same time as low ARPU figures discourage investment by mobile operators. The opportunities for potentially massive impact in such fundamentally important fields as education and healthcare need users to become sufficiently well-educated and skilled to demand greater access to the technology and its benefits.

While there is a strong social argument for bringing more people in emerging countries online, there is an equally compelling economic one. Research has shown that each additional 10 percentage points of internet penetration adds 1.2 percentage points to per capita GDP growth in emerging markets, and each additional 10 percentage points of broadband penetration adds 1.38 percentage points of per capita GDP growth.58 Separate research by The Boston Consulting Group shows that people in emerging countries are more frequent and active users of online government services than those in developed countries and they are particularly heavy users of services with a significant impact on life and livelihood, such as those related to healthcare and education. Emerging market consumers are embracing the web as much more than a purveyor of convenience; they are using it to improve their well-being, intellect and earning ability.59

While each market has its unique characteristics, multiple challenges are common factors, which are distinct from those facing the developed world. These include:

The challenges are big, but emerging markets actually have the opportunity to adopt new and in many ways more versatile technology without having to support legacy infrastructures. They do not need to follow the path of the US and Europe; the lack of existing infrastructure allows operators to adopt and implement the technologies that suit their markets’ current situation and projected requirements. Some of the ways in which emerging markets can accelerate development of their digital service sectors and digital economies include focusing on new technologies, especially those that can address infrastructure needs, such as mobile; pursuing public-private investment partnerships; encouraging the development of local services that use digital technology to address local needs; and developing innovative funding and market access mechanisms. (See Figure 16.)

Figure 16: Emerging Markets – Big Challenges, Big Opportunities

Focus on New Technologies

The lack of broadband penetration in emerging countries – especially fixed, but also mobile – is well documented. This ought to represent an opportunity – many emerging markets are free to adopt new technologies, such as LTE and fibre, without the burden of managing legacy infrastructures. Progress has often been slow, however. India, for example, has struggled to develop digital infrastructure. Fixed broadband reaches less than 10% of households, and while mobile penetration has hovered around 75%, it is dominated by 2G networks; 3G and 4G penetration is less than 5%. There is also a strong urban-rural divide, with mobile penetration in urban areas topping 160% while in rural areas it does not reach 40%.60 Indian mobile operators struggle with fierce competition, low consumer spending power and poor spectrum management.

The cost of smart devices remains an issue as well. Despite attempts by manufacturers to bring less expensive smartphones and tablets to market, prices for 3G and 4G handsets have remained too high to boost additional demand for data services in many emerging markets.

Despite such constraints, India is nonetheless an example of creativity and entrepreneurialism that makes the most of the mobile connectivity that is available. Competition among 2G operators has led to the creation of an ecosystem of value-added services built around the networks and less sophisticated feature phones that provide users with a wide array of services. Many Indians use their devices for entertainment and information, and are now starting to conduct basic financial activities such as bill payment. Matrimonial matchmaking and astrology sites are highly popular. Farmers use mobile phones to check commodity prices. In a country with more mobile-phone subscribers than individuals with bank accounts, “mobile money” has huge potential. The Boston Consulting Group has estimated that by 2015, $350 billion in payment and banking transactions could flow through mobile phones in India, compared with around $235 billion of total credit- and debit-card transactions today.61

The mobile pump is primed, and a gusher of activity can be expected to flood India when smartphones penetrate the market more widely. Some observers believe the major market shift may be imminent with the advent of pan-Indian 4G service offered by Reliance Jio. The unified voice and data services on a 20 MHz band may bring the speed and capacity increase needed to jumpstart the Indian mobile data market.

Four out of five internet users in sub-Saharan Africa go online using mobile phones, according to TNS, a market research firm. Mobile connections in Africa are projected to grow at an annual rate of 21% between 2012 and 2016. The government of Rwanda hopes to establish its country as a regional information- and communications-technology hub by 2020 and has embarked on building a fibre-optic network and an advanced data center.62

In other emerging markets, fibre-optic cables and new IP exchange points are the modern-day equivalent of providing landlocked countries with ocean port access. They open up an entire world (literally) of new trade routes and partners. Undersea fibre cables have brought high-speed access to both the east and west coasts of Africa in recent years, for example. Main One’s cable system, which links West Africa with Europe, was the first submarine cable to bring open-access, broadband capacity to multiple countries in West Africa. Google’s Project Loon is experimenting with high-altitude balloons to “connect people in rural and remote areas, help fill coverage gaps, and bring people back online after disasters”.63 In Kenya, Microsoft has partnered with the Ministry of Information and Communications and a local internet service provider to bring low-cost internet access and charging stations to rural communities that lack electricity, using a solar-powered wireless broadband network featuring TV White Space radios.

Public-Private Commitment

There is a greater role for governments to play in emerging markets, particularly as catalysts for essential infrastructure projects. Public-private partnerships are a time-tested method of getting big infrastructure projects off the ground, although it is important to ensure that the capabilities and experience of private market players are not lost and that public sector involvement does not lead to market distortions. Several emerging economies are using this tool to build out digital infrastructure and increase internet access.

Public and private sector players in Brazil have come together to develop and implement a plan for boosting digital penetration and use by building out infrastructure coverage and raising service quality. Smart policy has led to a well-functioning marketplace.

Competition is facilities-based with three or four major operators in each of the fixed, mobile, and pay-TV markets, with some overlap among them. Spectrum policy spurs competition among mobile operators and propagates mobile broadband coverage. LTE spectrum assignments through an auction process in 2012 linked ownership to comprehensive coverage obligations to ensure access is brought to rural or less desirable coverage areas. An auction of the 700 MHz band of spectrum is expected in 2014. It is hoped that the Brazilian government will make appropriate efforts to clear this band and encourage investments in new networks.

Brazil nonetheless has issues related to penetration and coverage. While mobile penetration in Brazil already exceeds 100%, it is mostly 2G coverage. The rollout of 4G networks begins this year. The Brazilian National Broadband Plan combines government spending on fibre networks with public-private partnerships to provide basic broadband access at a low cost. The first phase (2010-2013) has 30% of the population covered. The ultimate goal is 90% fixed-line coverage.

In Malaysia, the government launched Telekom high-speed broadband (HSBB) in 2009 with a subsidy of RM 2.4 billion (about $730 million) to “expand the communications network to ensure more equitable access to information and services”, and to “bridge the digital divide”. At the time, broadband penetration was only 22%. The broadband service based on HSBB offers special packages for low-income households in both urban and rural areas.

While the government contributed approximately 20% of the total capital, operational control remained in the hands of Telekom Malaysia. To ensure fair play and competition for all industry service providers, the government subsidy, issued under a public-private partnership agreement, committed Telecom Malaysia to open its network to its competitors. This competitive, open market will help to create multiple “innovation clusters”. As of early 2013, broadband penetration in Malaysia had increased by a factor of three to 66%. The HSBB project is expected to increase national GDP by 0.6% and create 100,000 new jobs by 2018.64

Local Digital Services Can Address Local Issues

It is easier today to open a mobile bank account in Kenya than in Kansas. The development of local digital service markets can be a big step towards addressing local problems.

Like other emerging markets, Kenya is unconstrained by the legacies of infrastructure, regulations and inertia. Its success with mobile money – two-thirds of its citizens use the technology – shows how technology can be put to work addressing local needs. In many African countries, mobile phones are helping people run businesses, find jobs, pay their bills, transfer money, learn, share, bank, and connect with family and friends. Mxit, a South Africa-based mobile-messaging platform, claims to be Africa’s biggest social network, with 7 million monthly active users and more than 65 million registered users.

Elsewhere on the continent, other new services are starting up. In June 2012, Angola’s Education Ministry and mobile-network operator Unitel partnered with Huawei to launch E-net, a project designed to provide free internet access for selected groups of public and private secondary-school students across the country’s 18 provinces. Similarly, pan-African operator Airtel recently partnered with Wikimedia to provide free access for its subscribers to Wikipedia. The government of Botswana has launched a National Broadband Plan with the aim that all appropriate government information and services (more than 300 services in all) will be available through a single government portal by 2016.65

Local app development is beginning to take hold in a few countries, where they provide important local language resources for local users. Chinese users already spend far more time on apps developed locally than those from other countries. Brazilian users are also spending considerable time using locally developed apps. Local digital ecosystems are vital developments for serving local needs and boosting competition in an increasingly international digital service market.66 By maintaining a free and open internet, governments have a role to play in fostering future development of these ecosystems and enabling compelling app development within them. (See Figure 17.)

Figure 17: “App Economy” Already Emerging in Brazil and China

Source: Flurry Analytics, GSMA, BCG analysis

A Role for Innovative Funding and Market Access Mechanisms

The economics of many emerging economies make infrastructure (as well as other) investment tough. At the same time, a growing number of governments, companies and organizations recognize the benefits of expanding internet access as widely as possible. They also see that gaining access can have an outsized impact for people who live in particularly poor and remote areas.

Bridging this divide may require non-traditional and innovative approaches. Internet.org is a partnership started by a group of major technology companies (the founding partners include Ericsson, Facebook, Mediatek, Nokia, Opera Software, Qualcomm and Samsung) with the goal of working with governments and NGOs to bring basic internet services to people who do not have them. Facebook founder Mark Zuckerberg describes it as “the on-ramp for the internet”. The underlying philosophy is that demonstrating the internet’s value for free will cause users to want to pay for more or better services down the road (which is not too far removed from how internet use evolved in the rest of the world).

Public-private partnerships, such as the one being pursued in Malaysia, have an important role to play. The M-Pesa money transfer system in Kenya is the result of collaboration and public and private sector organizations. The government of Rwanda and KT, the Korean telecommunications company, have developed a joint venture to roll out 4G LTE access to 95% of Rwandans.

There may be a productive role for funding and coordinating organizations that can help match players and provide seed capital to advance innovative ideas for expanding digital infrastructure and access as well as sharing costs and capabilities. Such programmes could involve non-traditional companies and explore the possibility of infrastructure-sharing among entities. It would be important to ensure that any non-traditional mechanisms focus on especially poor and hard-to-reach areas and do not impede traditional private investments.

The World Economic Forum’s digital infrastructure initiative will be exploring issues related to emerging markets in more detail in the coming year.